After three years of pandemic-related relief and extensions, the federal student loan pause on repayments is officially over. Some 27 million people have restarted making payments as of October 1. In total, an estimated 40 million people owe federal student loans. That’s all according to Claire Ballentine, a Bloomberg personal finance reporter.
To ease the pain, the Biden administration has introduced plans meant to lower payments for borrowers. Applying, as she explains, is straightforward and possible through the Federal Student Aid website.
That includes SAVE, a new plan that calculates monthly payments based on income and household size. It replaces the Revised Pay As You Earn (REPAYE) Plan.
Another plan is the so-called “on-ramp” program that allows borrowers to miss payments without immediate consequences for up to a year.
“[It’s] meant to shield borrowers from the worst effects of not making payments. So interest will still accrue if you don't make payments, but the hit to your credit score and having it sent to bill collectors — that's not going to happen for a year. So people have a little bit of wiggle room in that regard,” she explains.
More: How to manage financial stress as Oct. 1 student loan deadline nears
A big issue facing borrowers right now, as Ballentine explains, is confusion over who they owe money to. She chalks it up to many individuals’ loan servicers changing during the pandemic.
“Maybe their income changed during the pandemic — that can affect their payments. Maybe they're trying to do Public Service Loan Forgiveness now, and that's going to affect their payments. So it's a complicated mess, essentially,” Ballentine says. “This whole system was not meant to go into hibernation for three years and then start back up all at once. It's a tremendous amount of payments and people and government logistics happening all at once.”
Ballentine adds that the U.S. Supreme Court striking down President Joe Biden’s student loan debt forgiveness plan likely didn’t help matters. “That was a big setback. That program would have wiped out debt for a lot of people. So some wouldn't even have to be making payments and dealing with this in general.”
Payments ramping up might also have implications for the broader economy. Ballentine says it could reduce U.S. consumer spending by $100 billion, while the country’s economic output could drop by 0.3% in 2024.
“Those percentages sound pretty small, [but] that's a big impact of student loan payments starting back. So I think there's been some projections about how this will play out. I think, regardless, we are going to see consumers spending a little less on discretionary goods, given they have to make these payments, but the full effects of that are yet to play out. That's also happening right as the fed is weighing future [interest] rate hikes or rate cuts, and the U.S. stares down a recession.”